In Ramirez v. Charter Communications, Inc., the Supreme Court today finds three terms in an arbitration agreement to be unconscionable, but it concludes the agreement might still be enforceable if the invalid terms are stricken.
In a fired employee’s action for discrimination, harassment, and retaliation under California’s Fair Employment and Housing Act, the court’s unanimous opinion by Justice Carol Corrigan states that the arbitration agreement the employee signed was an “adhesion contract required as a condition of employment” and that, “although adhesion alone generally indicates only a low degree of procedural unconscionability, the potential for overreaching in the employment context warrants close scrutiny of the contract’s terms.”
The court then finds substantively unconscionable these terms: (1) compelling “arbitration of claims more likely to be brought by an employee and exclud[ing] claims more likely to be brought by [the employer],” (2) requiring submission of a claim to the employer within a time that “truncates the period the Legislature has determined employees need to effectively vindicate their rights,” and (3) awarding interim attorney fees against a party who incorrectly resists arbitration, even though, by statute, fees in FEHA actions can be awarded against a plaintiff only if “the action was frivolous, unreasonable, or groundless.” On the other hand, the court found unobjectionable a term limiting discovery, as long as the term is “construed to allow the arbitrator to order additional discovery as needed to allow a full and fair exploration of the issues in dispute.”
However, despite the invalid terms, the employer can still force arbitration, the court finds, if the invalid terms are severable and it leaves to the Court of Appeal resolution of the severability issue. But, the court directs, it’s the quality not the quantity of invalid terms that’s determinative: “no bright line rule requires a court to refuse enforcement if a contract has more than one unconscionable term. Likewise, a court is not required to sever or restrict an unconscionable term if an agreement has only a single such term. . . . At the outset, a court should ask whether ‘the central purpose of the contract is tainted with illegality.’ ” Moreover, the court holds, failing to rehabilitate the agreement by severance won’t violate the Federal Arbitration Act: “The approach adopted here is not hostile to arbitration.”
The court reverses the Second District, Division Four, Court of Appeal published opinion concerning the discovery term and the appellate court’s severability analysis. The court disapproves Patterson v. Superior Court (2021) 70 Cal.App.5th 473 by the Second District, Division Seven, to the extent Patterson held the attorney fee term was salvageable by construing it as allowing a fee award against a plaintiff only if their opposition to arbitration was frivolous. There was no petition for review in Patterson. The court also disapproved the “line of reasoning” in several Court of Appeal opinions that determined the validity of discovery limitation terms in light of “post-contract formation circumstances” instead of focusing only “on circumstances known at the time the agreement was made.”